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German think tanks lift growth forecasts

Germany's leading economic institutes have predicted record budget surpluses over the next two years as Europe's biggest economy will continue powering ahead amid higher-than-expected growth rates.

Basking in increased domestic consumption, exports and investment, Europe's biggest economy is expected to grow by 1.9 percent this year and 2.0 percent in 2018, according to a forecast published by German economic think tanks DIW, Ifo, IfW, IWH and RWI on Thursday.

The upswing in the German economy had gained "in strength and breadth," the report said, adding: "The strong global economy and especially the continuing upturn in the eurozone are stimulating exports."

Even the current appreciation of the euro against other currencies would only have a limited braking effect, they said, and Britain's exit from the EU would "avoid sudden breaks" due to the envisaged "extended transition period."

Also the risk of more protectionism as a result of new US trade policy had diminished as the changes by the Trump administration appeared "much less drastic" than feared.

The unemployment figure should shrink from 5.7 percent this year to 5.5 percent next year and 5.2 percent in 2019, they calculated.

More jobs and higher growth will also fill state coffers, prompting the government budget surplus to reach 28 billion euros ($32.9 billion) this year and 44 billion euros by 2019 if policies are left unchanged.

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"In light of the high burdens imposed on labor incomes… and a particularly sharp increase in direct tax revenues, the focus should be on the income tax rate curve," they noted. Moreover, there was "scope for action" on reducing social security contributions, especially for low-income workers.

The report also called on the new government to work towards a reform of the pension system before "the full impact of the demographic change strikes," when the generation of German baby boomers will retire over the next decade.

Noting that "the ageing process is already under way," the authors wrote: "The German economy is currently undergoing an interim high…, which will turn out considerably lower in the coming decade for demographic reasons."

But Chancellor Angela Merkel has ruled out lifting the retirement age to 70, after introducing a phased increase in the retirement age to 67 from 65 until 2029.